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May 3, 2012

John Bogle: The 2012 IA 25 Extended Profile

If you don’t understand the benefits of indexing by now, John Bogle feels sorry for you

John Bogle, Founder, Vanguard

There’s something reassuring about John Bogle’s passion and the fact that it hasn’t waned with age. We asked a few questions and got quite an earful (albeit a polite, gentlemanly earful).

We began by noting what is perceived as a sea change in financial services. Stung by criticism in the wake of the 2008 downturn that their products didn’t deliver what was promised, companies are beginning to adopt more of a “client first” position. Does he believe this to be true, or will it be “more of the same” from the investment industry?

“It will always be more of the same,” Vanguard’s founder answered. “Although I agree I’m seeing a little more movement in the direction of serving clients’ needs first.”

The bigger sea change is one that’s more personal to Bogle; the public and the media are finally beginning to “get” the advantages of low-cost indexing over higher-cost active management.

“The money flows into Vanguard and the corresponding outflows from the majority of the other top 50 firms is enormous,” he marveled. “At this point, if you don’t get the message [about the benefits of indexing], I feel sorry for you.”

It’s a message he said resonates and one that he believes is here to stay.

“I had a reporter recently ask me about the fact that indexing beat 83% of all managers last year,” Bogle said. “He wanted to know how I felt about it. I said, ‘I don’t feel anything about it.’ It’s a random number. It is what it is. Sometimes it will perform better (although I don’t think it can perform much better than that), and sometimes it will perform worse. But as a group of investors, we can’t outguess what the other guy will do on a large scale. It simply won’t work. It’s beyond me why people don’t get this.”

If we could trade for free then investing would be a zero sum game, he added, but we can’t so it isn’t. The more investors trade, the more investors pay, and then only the traders making the fees win.

“People are getting this, and indexed-type products that feature simplicity will win,” he said, before predicting “This will mark the next couple of years, at least. I read this type of thing in The Economist. It’s the best possible commercial for Vanguard, and we’re never even mentioned by name.”

“No tax rate should be lower than for those who get up every day and earn a living from the furrow of their brain or the sweat of their brow,” he said when asked about his contrarian stance on the subject. “Dividends are almost tax-free as it is, as 70% of dividend-paying investments are owned by tax-exempt institutions. Not many people realize that.”

He added that he’s “a little sensitive” to concerns about incentives for individuals to reinvest for retirement, and therefore would support making the first $10,000 or $20,000 somehow exempt, which he said would “help people save and at least do some social good.”

“And as far as capital gains, speculators are gambling with those gains anyway,” he added. “As I point out in my upcoming book, right now Wall Street is 99% speculation and only 1% investment. This isn’t investing. Teddy Roosevelt was on to this argument in his speech all the way back in 1911 in Osawatomie, Kansas.”

But what about the fact that the United States now has the highest corporate tax rate in the world?

“That is a barefaced lie,” Bogle emphatically countered. “We all fall back on numbers that support our positions, but right now corporations pay an average of 20%, with many paying nothing. The best way to clear it up is to simply eliminate all the tricks in the tax code. But companies instead want to cut the corporate rate without eliminating the tricks. Cut or keep; you can’t have both.”